Wednesday, March 18, 2009

Nifty - Facing resistance after strong rally

After a pretty decent (around 10%) rally over the course of last 4 sessions, markets today finally corrected a bit after facing multiple resistance around the 2800 area and on profit booking. Such action is expected, after such large rallies, price action needs to take a breather before it can start moving up again. So when price action faces resistance after such large upmoves, they are bound to give up some bit of the gains. People who went long look to book profits. Shorts who were waiting to enter find themselves with good levels again to go out & short and resistances offer them good risk-reward ratio.

First & foremost resistance was from the previous triangle from which price broke down a few weeks back. Look at the chart above.
The former support line of the triangle was now expected to act as resistance which it has. This is typical of such patterns, supports turn into resistances once on break of that support.

Next resistance was in the form of the 50 day moving average at around 2808 for the day. Nifty made a high of 2805.6 for the day, just touching the 50DMA (blue line in the chart above) and corrected downwards.

The third one came from this bearish wedge formation on the intraday charts (chart below). This is the 5 day intraday chart of Nifty spot.We can see a wedge being formed since Thursday 12th march. Such upward sloping wedges, also called bearish wedges, generally break on the downside. This is what we saw on today. Markets initially rallied to 2800 levels, where it faced multiple resistance. Then it gave back the gains, broke below the bottom support line and then fell a bit more.

And lastly we also had a fibonaci resistance from the 0.618 retracement of the down move from 2969-2539 at 2805.

But where do we go from here ?

Look at the first chart again. The MACD indicator at the bottom has just made a positive crossover & thus a bullish indication to go long. Stochastics too has emerged from oversold territory with a buy signal & RSI is positive and rising. More than the RSI & the stochastics, MACD gives more reliable signals. It doesnt mean that markets will definately go up, but the probability is good that it will, and that the rally may continue for a few more weeks. I also trade currencies, and from there too, the indication seems that this rally might have more steam left to go.

So then what do we do? We buy on dips. The dip just started today, should have further room on the downside, before it makes an attempt at crossing these resistances again. With such heavy resistances it might take a lot of effort to clear all the resistances and we see a decent down move. 100 DMA also looms at 2845 as a resistance.

Price should fall atleast till 2705 (.382 retracement of the 2545-2805 move), more likely even upto 2675 (50% retracement).
10 day moving average stands at around 2660 and the 20 day MA at 2725. So I would wait to re-enter between 2675-2705. Price should ideally keep above both the 10DMA as well as the 50% retracement for the bullish case.